The Growing Public Pension and Muni Bond Bubble

A credit bubble is created when the amount of money borrowed exceeds the capacity of the borrower to pay it back. This concept is easy to understand, but the financial foundation of borrowing has been manipulated to an historic extreme by government. Not just through the national debt but through the agreements to create debt through public sector union contracts and municipal bond issuance.

The scale of the public pension and muni bond bubble has not been widely reported. There are 90,000 units of government in the U.S. A large number of these have public pension plans. In 2014 there were 19.5 million people enrolled in public pension plans and 9.6 million receiving pensions. In California alone there were 3.36 million people receiving public pensions. Since there were 23 million people in California age 21 and over this means that over one in seven California adults is currently receiving a public pension. 

By definition, a public pension plan must be financed partially or completely by public contributions: taxes. Since these plans are defined geographically -- by school district, city limits and state boundaries -- they mandate huge public revenue demands on local incomes. The question is how big this bubble is today. And unlike the mortgage bubble, it is not created by tens of millions of homeowners, but by a very small number of public sector union leaders who control city and state contracts. 

Biggs estimated that the entire amount of unfunded pension liability in the U.S. was $4.6 trillion in 2011, but this figure did not include municipal bond debt which, when combined, brings the total unfunded pension and muni bond liability to $8.3 trillion. This amount is far greater than the mortgage meltdown and is not included in the Treasury Department's balance sheet or the national debt. 

But unlike the mortgage credit bubble that led to the 2008 crash, public pensions are not debts, since the money to finance them was not borrowed, it is just allocated to be paid by future appropriations, i.e., your taxes. 

While pensions are not strictly debts, they are treated as debt for taxpayers since taxpayers are forced upon threat of financial punishment to pay them. For example, someone who doesn’t pay their property tax bill will have their house seized and sold to pay the public pension bill. 

The public pensions themselves are not founded in constitutional authority to tax since they are future appropriations of tax revenue. So they, in effect, impose taxes upon residents who are not yet born. This is not consistent with the concept that appropriations require the consent of the governed. 

Because these pension appropriations exist only in the abstract, they are not based upon borrowing standards. No risk management standards exist, at any level, to constrain pension debts to financial borrowing qualifications such as credit, capacity, and character. If this whole issue is beginning to sound like a con game that’s because it is. There’s no accountability. 

So while the mortgage lending crisis was caused by a loosening of underwriting standards, the disturbing and ominous fact about the public pension and muni bond bubble is that it was not created by changes in standards:  no standards ever existed. So the term “subprime” does not apply. There are no credit ratings for public pension plans.

What’s interesting is that while social security’s funding numbers are published, there is no reliable national source of information on pension funds. Social security funds are expected to run out of money in 2034 but while there are municipal bonds that last until 2030 and 2040, there is no urgency about how they will be paid. Information is lacking: the IRS does not have an income-type category for public pensions. The website does not tick off the total amount of public pension liabilities. 

So when public pension contracts are established they are guaranteed to fail. This is because public pensions are never constrained by the revenues paid by taxpayers. When more money is needed for pensions, they simply raise taxes. Think of it this way: when a homeowner applies for a mortgage, they have to give accurate numbers as to their income and monthly bills. They have to accurately report their assets and liabilities. I am not aware of any large public sector pension plan that is honestly based upon, and limited by, an accurate accounting of the incomes of the taxpayers who are forced to pay the pensions. And muni bonds are in the same situation: muni bond issuers do not have to report the future pension liabilities of their city, pension plan, or school district.

These pensions are created behind closed doors, have no limits and are out of control. In 2014 Robyn Gordon Peterson of the Long Beach Public Transportation Co. had a pension of $1.2 million dollars and this did not include benefits. The Los Angeles Police and Fire Depts. and San Diego City; have one retired Assistant Fire Chief whose pension is $871,605; three others with pensions in the $800,000s; (from 800K to 899K) seven in the $700,000s; twenty-three in the $600,000s; seventy-four who receive in the $500,000s; and seventy-nine who receive pensions in the $400,000 range. This means just 194 people collect over $80 million a year. And this doesn’t include tens of thousands who collect pensions in the $300,000 range, the $200,000 range, etc.

Michael Moore is nowhere to be found.

This disconnect is why all state public sector pension plans are underfunded. The average public pension is only 41% funded. This is the quintessential definition of a bubble.

And when they crash, they will crash under different circumstances than the mortgage meltdown. It’s important to realize that this crash will not occur all at once, as when the MBSs crashed. It will be a spreading financial crisis that moves from one pension-bankrupted city to another. This is already happening.  

The only sudden crash will be felt by muni bond investors, who will have their investments seized. Both bankruptcy court judges in Stockton, CA and Detroit, MI ruled to shortchange the muni bond investors. In Detroit, Syncora, who insured pensions, lost 86% of what it was owed. In Stockton, CA Franklin Templeton investors lost 88%. Muni bonds are guaranteed to fail since they are issued based only on the voluntary reports of the issuing municipalities, not sound financial rules, as corporate bonds must. And 75% of muni bonds are held by private individuals. The public sector unions which created these bubbles did not suffer financial losses. The Federal Judges only kicked the pension bubble down the road.

Public pensions give unequal treatment both under the constitution and in accounting rules, establish a shadow ruling oligarchy without the consent of voters and bankrupt government at all levels.

There is another important constitutional issue. The Supreme Court has already ruled that campaign donations are a form of speech. FEC records show that the SEIU, AFSCME, the American Federation of Teachers and National Education Association give 99% of their campaign money to Democrats. This is unconstitutional, since citizens are forced to subsidize without their consent, through extortive property taxes, the political speech of these public unions.